(Aug 29): Argentina’s government plans to extend the maturity of its debt to stabilise markets after a brutal week of declines that saw it struggle to rollover Treasury bills.
The government will extend the short-term maturities for institutional investors and send a bill to congress to enable the “voluntary reprofiling‘’ of longer-term debt, Economy Minister Hernan Lacunza said. The interest rates will remain the same, only the timing changes.
“The government is aiming to clear the outlook for the financial program in the short, medium and long-term horizon,” Lacunza said. “This is due to short-term liquidity stresses and not due to problems with the solvency of the debt.”
The announcement follows a dramatic week for Argentina that saw bonds fall to a record low and the peso slump. By the end of trading on Wednesday, investors were pricing in a near 90% chance that the country will default in the next five years. Today’s measures will ease some of the immediate pressure on government and central bank finances.
“I think it’s neutral to positive,” said Ezequiel Zambaglione, head of strategy at Balanz Capital Valores in Buenos Aires. “In the worst case scenario, nobody accepts the offer and you are in the same situation as yesterday. And if they reach an agreement and are successful in the swap, you’ll have less funding needs for the next years.”
As the crisis mounted in August, the central bank rolled over less than 10% of Treasury bills falling due and held by the private sector.
”One of the metrics we’ve been monitoring for our clients has been the rollover rate for domestic T-bills,” said Roger Horn, a senior emerging-markets strategist at SMBC Nikko Securities America in New York. “Today’s 10% success rate apparently made it clear to the finance team that something big needed to be done.”
Argentina has struggled to rollover the debt in the wake of a stunning loss in a primary for the market-friendly government coalition. The country holds a presidential election in October with the change of government in December.
“We are surprised by the timing of the measure and skeptical that it will achieve the desired results,” Bloomberg Economics analyst Adriana Dupita said. “Postponing payments may provide temporary relief, but does not change the crux of the matter.”
Officials from the International Monetary Fund are currently in Argentina as the Fund considers the disbursement of the next tranche of its loan program. The US$5.3 billion ($7.4 billion) is essentially to stemming the flight of capital out of the country.
The officials are “in the process of analysing” the measures announced Wednesday, the IMF said in a statement. “Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves.”
Foreign-currency reserves have plummeted more than US$10 billion in the past month as policy makers sought to shore up the peso after the primary on Aug 11.
The currency has tumbled 28% since the primary, even as the central bank takes increasingly drastic action to defend it. The bank sold US$367 on the currency market Wednesday and US$302 million the day before, according to a people with knowledge of the matter.
Tens of thousands of people marched through the streets today to demand the government do more to mitigate the impact of the economic crisis in a country that has defaulted on its debt eight times since independence from Spain.
“This is the first time I’ve ever seen this -- a president in the middle of elections proposing a debt re-profiling,” said Francisco Ghersi, managing director of Knossos Asset Management, which holds some Argentine bonds. “Still, if Macri succeeds with the swap, this could help his political standing before the vote.”
